You know the feeling. You talk to a friend with a snazzy new handset that does amazing things. Or you see an advertisement for a great deal on a monthly plan. Then what do you do?

You sigh, wistfully wishing you could shop for a new phone. If you are really on top of things, you call your provider and ask when your current cell phone contract expires. And then you wait.

One thing you don’t do: You don’t act like a rational consumer in a normal, functioning market economy. You don’t go buy the new phone, or get the cheap new plan. You don’t reward the more efficient company with your business. You can’t. You’re in jail.

Imagine if you couldn’t switch coffee shops or grocery stores without paying hundreds of dollars in penalties. Preposterous? No — not in the world of cell phones.

From the start, wireless providers have worked hard to lock you up into losing situations, constructing walls with cancellation fees, service-specific phones, and the loss of your phone number.

Worse yet — cell phone companies can, and do, change their side of the contract unilaterally. Consumers seemingly have no options to decline the higher prices. In other words, they can raise prices, and you can’t quit. Consider this note of complaint, filed with the Pennsylvania Public Interest Research Group by a consumer named Kerry:

I’m currently in the middle of a two-year contract with Verizon Wireless. They just notified me that they are dramatically increasing the charges I pay for receiving each text message from 2 cents to 10 cents.

When I called to complain, they left me with a few choices, and I was unhappy with all of them. I could simply accept the increase in charges. Alternatively, I could sign up for an unlimited text messaging plan for another $5/month, but only if I renew with Verizon for another two years. Or, I could end my contract and pay an early termination fee of $175.

If I don’t pay the fee and change my plan to get the best rate for text messaging, then I'm locked in with Verizon for even longer than I originally would have been had they just kept the rates the same. And since the new plan also has an early termination fee, I’ll face the same problem if they decide, without my agreement, to change the plan again to suit their needs.

Make no mistake about it — like Kerry, most cell phone users are captives. In 2005, IPSOS North America surveyed 1,000 U.S. adults and found that 47 percent would consider switching services if termination fees were eliminated. Fully 36 percent said fees already had forced them to stay in a higher-priced plan against their will.

This, it should be obvious, is economic lunacy. And it certainly explains why U.S. residents suffer from what is remarkably among the world’s least reliable cell phone services. After all, what’s the incentive to fix the U.S. network? NBC Nightly News anchor Brian Williams, on his personal blog, mentioned wistfully once that he often enjoys “crystal clear, uninterrupted” cell phone conference calls to New York while on the road in faraway, “middle of nowhere” places like the highway from Amman, Jordan to the Dead Sea. But on his daily commute into New York City? That’s another matter. In fact, cross-country drivers on the main east-west highway in the northern U.S., Interstate 90, will find this sorry fact: they can’t make a reliable phone call all the way from Chicago to Seattle.

It’s an embarrassment, but it’s completely predictable. Captive consumers are bad for everyone, consumers and businesses alike. Why would anyone start a new cell phone company in this environment? Why would anyone invest in customer satisfaction?

Consumers have managed to tear down one wall in this jail. In 1996, the FCC ruled that consumers who switched providers didn’t have to surrender their phone numbers, mandating what’s called number portability. Of course, it took nearly 8 years of legal battles to force wireless carriers to play along, but finally, in November 2003, consumers were allowed to switch carriers without switching numbers.

There was an immediate impact. About 367,000 consumers abandoned AT&T Wireless in the first quarter of 2004, an incredible number given that cell phone carriers were enjoying unprecedented subscriber growth at the time. Like dogs suddenly let off their leash, consumers began a mass exodus from the notoriously unreliable provider as soon as they could. The exodus eventually brought the company to its knees, and it was forced to sell out to Cingular. Competition works. That’s capitalism. Bad companies don’t deserve to be propped up by bad regulations or supportive government agencies.

The wireless providers who watched the demise of AT&T learned quickly; and the wall that was knocked down — number portability — was rebuilt even taller. In 2004, most carriers extended typical contracts from one year to two years. Nothing portable about that! By 2006, cell phone jail was more fortified than ever.

And in the ultimate irony, cell phone firms found a way to profit handsomely off number portability. Beginning about a year before portability kicked in, cell phone firms began charging roughly $1 per month per customer for number portability — at one point collecting nearly $100 million per month, according to the Center for Public Integrity! The fees were hard to spot, often lumped into a line item called “federal recovery fee,” or something similar. Collectively, the industry took in more than $1 billion before the practice was curbed.

Terminating early termination fees
Bottom line: Firing your cell phone company will cost you $150-$200, at least. A family of four that wants to cancel service can pay $800 to do so.

The argument you will hear incessantly from mobile phone providers is this: Consumers pay far below cost to buy their cell phones because the price is subsidized by carriers and the termination fees are merely a means to recover some of that subsidy for consumers who bail early. Callers should be happy they can buy a cheap phone, and accept the consequences if they quit early.

Of course, if that were true, the cancellation fee wouldn’t be the same for consumers who quit after three months as it is for consumers who quit after 19 months. Verizon Wireless conceded this point in 2006 when it announced it would begin pro-rating early termination fees. Unfortunately, other carriers didn’t follow suit.

Consumers who don’t want to pay early termination fees do have options. They can use pre-paid, disposable cell phones, a small but growing part of the industry that doesn’t require contracts with termination fees. Or they can pay full retail price for the phone upfront. They can try to pawn their phone and plan off on someone else (cell phone contracts allow transfers at places like CellTradeUSA.com). Or they can throw themselves on the mercy of a customer service representative. Having a good story to tell apparently helps. Internet Web sites are abuzz with hints on how to get a firm to waive the fee. The most common recommendation is to use a firm’s coverage map to find a zip code that isn’t covered, then call and claim to have moved there. Results to that one seem to be mixed; many providers require proof of address.

Another popular tip is to become an expensive customer. Start making calls outside of your cell phone firm’s coverage area, which will force your provider to pay for time on another provider’s network (we’re assuming here that you don’t pay roaming charges). After a few months, you’ll likely receive a polite letter strongly inviting you to find another cell phone company.

Once in a while, cell phone companies themselves open up a window of opportunity for early cancellation. In 2006, when most carriers upped their text message prices, they had to send new agreements to users. Some consumers used these as an opportunity to decline the agreement and attempt to void their current contract. Because a change in terms could be interpreted as a change in the contract, the change constitutes a termination of the original pact, the argument suggests. Cell phone firms fought back, but often relented, when consumers used this tactic.

A popular myth holds that lack of adequate service — a poor signal at home, for example — is enough to void your cell phone contract. This might seem crazed (doesn’t the contract imply that the cell phone provider is bound to provide you with cell phone service for two years?), but that’s not true. Service quality is not part of the contract. Poor service gives consumers no right to cancel.

Dying, however, seems to work. Carriers will release you from your contract when you reach the great beyond. Only a few carriers require copies of death certificates to prove you’re dead. Others will take your word for it.

Picking your phone’s locks
Termination fees are not the providers’ only trick to win forced loyalty, however. In fact, they have become a bit of a red herring in the cell phone jail debate. With monthly bills creeping up towards $100, a $175 cancellation fee doesn’t sound so bad. Increasingly, cell phone jail is much more a function of hardware than contracts. Paying a $175 fee is one thing; throwing out fairly new $500 handset is quite another.

Isn’t it amazing what phones can do today? They can pull up Web pages in a moving car. Take pictures and videos. Schedule appointments. Even give directions. It’s a wonder these smart phones can’t be used to make dinner or launch rockets. And yet, there is one thing these technological marvels can’t do. They can’t work with anyone else’s network.

A T-Mobile phone usually won’t work on Cingular’s network. Verizon phones won’t work on either of those networks. The lack of interoperability might remind old-time techies of the days before the Internet, when you’d never imagine trying to make an Apple computer talk to a Microsoft-powered PC. That language barrier is a relic now. How can these incredibly sophisticated cell phones be so unsophisticated in this one way?

Well, it’s intentional. Cell phones are locked down by cellular providers with special software that prevents them from being used on other networks. In this realm, there isn’t even a pretense by cell phone providers about their intentions. The software is called “locking” software. With consumers now paying $500 or more for these not-so-smart-after-all smart phones, locking software is the best tool yet cell phone companies have invented to lock up consumers. Even after a consumer’s contract has run out, even after a consumer finds a competitor with a much cheaper per-minute plan, or much more reliable coverage, phone locks are still a major deterrent. You have to swallow hard to throw a fully functional $500 phone into the trash.

With that kind of money at stake, clever engineers (hackers! But good hackers!) have jumped in and worked up a work-around. There are ways to trick phones into ignoring the unlocking software. Internet sites sell such services for as little as $5.

Naturally, cell phone providers have spent a lot of time and killed a lot of trees trying to argue that use of unlocking tricks is illegal. Specifically, their lawyers have argued that unlocking software violates of the Digital Millennium Copyright Act, which was designed to keep thieves from circumventing software used to prevent pirating of movie DVDs, music CDs, and software.

Let’s look at this argument more closely. According to the industry, you paid $500 for a phone, but you’re not allowed to type in a small string of characters into the handset which allows you to use the phone as you wish.

Jennifer Granick, a high-profile lawyer based at Stanford University who often defends computer hackers, took on this argument in 2006. She suggested that courts had already rejected a similar argument from computer printer maker Lexmark, which fought to stop generic ink cartridges from working in its printers. Courts had also ruled in favor of generic garage door opener makers.

In late 2006, the federal government sided with Granick, deciding that unlocking a phone was not a violation of the Digital Millennium Copyright Act. By then, some companies were already starting to give in and give unlock codes to consumers who were clever enough to ask for them. Others firms were still stingy about it, but couldn’t prevent would-be unlockers from buying the software. Consumer advocates claimed victory. So did environmentalists, who saw new hope that fully-functioning phones wouldn’t end up in landfills quite so often, as they could now be re-sold and re-used. Many hoped that cell phones had been set free.

Not quite. The phones, as sold, are still hamstrung with locking software by default. Only those who know enough to ask ever consider using their phones on a competitor’s network. Despite the fanfare surrounding Granick’s case in techie circles, the vast majority of Americans still think cell hardware is limited to use with a single carrier. But now you know better. From Gotcha to Got Them!

Excerpted from GOTCHA CAPITALISM by Bob Sullivan. Copyright (c) 2007 by Bob Sullivan. Reprinted by arrangement with The Random House Publishing Group.